ECON 2106
“Economics is the study of mankind in the ordinary business of life” — Alfred Marshal
“Economics deals with all human action” — Ludwig von Mises
“The study of how society manages its scarce resources” — Gregory Mankiw
“People respond to incentives” — Steve Landsburg
“Economics shows how little we know about what we try to design” — FA Hayek
Unifying idea: Economics studies choices under scarcity.
Microeconomics: Decisions of individuals and firms
Macroeconomics: Economy-wide outcomes (growth, inflation, unemployment)
Economics uses models: simplified maps of reality
Key skill:
Economics: How society allocates scarce resources
Scarcity:
Scarcity ⇒ choice
Three core questions:
Written by Adam Smith
Not about gold or silver
Central claim:
Citation to the paper: Chinoy, Nunn, and Stantcheva (2025)
Sources of wealth:
Production split into tasks: Pin factory example of 18 tasks
Specialization → higher productivity because:
| Keri | James | |||
|---|---|---|---|---|
| Gadgets | Widgets | Gadgets | Widgets | |
| Production | 50 | 25 | 30 | 10 |
| Opp. Cost | ||||
| Keri | James | |||
|---|---|---|---|---|
| Gadgets | Widgets | Gadgets | Widgets | |
| Production | 50 | 25 | 30 | 10 |
| Opp. Cost | \(\dfrac{-25 W}{+ 50 G}\) | \(\dfrac{-50 G}{+25 W}\) | \(\dfrac{-10 W}{+ 30 G}\) | \(\dfrac{-30 G}{+ 10 W}\) |
| Keri | James | |||
|---|---|---|---|---|
| Gadgets | Widgets | Gadgets | Widgets | |
| Production | 50 | 25 | 30 | 10 |
| Opp. Cost | \(\dfrac{-25 W}{+ 50 G}\) | \(\dfrac{-50 G}{+25 W}\) | \(\dfrac{-10 W}{+ 30 G}\) | \(\dfrac{-30 G}{+ 10 W}\) |
| Opp. Cost | \(\dfrac{-0.5 W}{+1 G}\) | \(\dfrac{-2 G}{+1 W}\) | \(\dfrac{-0.\bar{3} W}{+1 G}\) | \(\dfrac{-3 G}{+1 W}\) |
| Keri | James | |||
|---|---|---|---|---|
| Gadgets | Widgets | Gadgets | Widgets | |
| Production | 50 | 25 | 30 | 10 |
| Opp. Cost | \(\dfrac{-25 W}{+ 50 G}\) | \(\dfrac{-50 G}{+25 W}\) | \(\dfrac{-10 W}{+ 30 G}\) | \(\dfrac{-30 G}{+ 10 W}\) |
| Opp. Cost | \(\dfrac{-0.5 W}{+1 G}\) | \(\dfrac{-2 G}{+1 W}\) | \(\dfrac{-0.\bar{3} W}{+1 G}\) | \(\dfrac{-3 G}{+1 W}\) |
| Opp. Cost | \(\dfrac{-0.5 W}{+1 G}\) | \(\dfrac{-2 G}{+1 W}\) | \(\dfrac{-0.\bar{3} W}{+1 G}\) | \(\dfrac{-3 G}{+1 W}\) |
| Keri | James | |||
|---|---|---|---|---|
| Gadgets | Widgets | Gadgets | Widgets | |
| Production | 50 | 25 | 30 | 10 |
| Opp. Cost | \(\dfrac{-25 W}{+ 50 G}\) | \(\dfrac{-50 G}{+25 W}\) | \(\dfrac{-10 W}{+ 30 G}\) | \(\dfrac{-30 G}{+ 10 W}\) |
| Opp. Cost | \(\dfrac{-0.5 W}{+1 G}\) | \(\dfrac{-2 G}{+1 W}\) | \(\dfrac{-0.\bar{3} W}{+1 G}\) | \(\dfrac{-3 G}{+1 W}\) |
| Opp. Cost | \(\dfrac{-0.5 W}{+1 G}\) | \(\dfrac{-2 G}{+1 W}\) | \(\dfrac{-0.\bar{3} W}{+1 G}\) | \(\dfrac{-3 G}{+1 W}\) |
| Opp. Cost | \(0.5 W\) | \(2 G\) | \(0.\bar{3} W\) | \(3 G\) |
James would never trade more than 3 gadgets for 1 widget
Keri would never accept fewer than 2 gadgets for 1 widget
Mutually beneficial exchange: 2.5 gadgets for 1 widget
| Sean | Bryan | |||
|---|---|---|---|---|
| Cooking | Cleaning | Cooking | Cleaning | |
| Time to completion (min) | 60 | 30 | 40 | 40 |
| Units produced in 2 hours | ||||
| Opportunity Cost | ||||
| Sean | Bryan | |||
|---|---|---|---|---|
| Cooking | Cleaning | Cooking | Cleaning | |
| Time to completion (min) | 60 | 30 | 40 | 40 |
| Units produced in 2 hours | 2 meals | 4 rooms | 3 meals | 3 rooms |
| Opportunity Cost | ||||
| Sean | Bryan | |||
|---|---|---|---|---|
| Cooking | Cleaning | Cooking | Cleaning | |
| Time to completion (min) | 60 | 30 | 40 | 40 |
| Units produced in 2 hours | 2 meals | 4 rooms | 3 meals | 3 rooms |
| Opportunity Cost | \(\frac{-4r}{+2m}\) | \(\frac{-2m}{+4r}\) | \(\frac{-3r}{+3m}\) | \(\frac{-3m}{+3r}\) |
| Sean | Bryan | |||
|---|---|---|---|---|
| Cooking | Cleaning | Cooking | Cleaning | |
| Time to completion (min) | 60 | 30 | 40 | 40 |
| Units produced in 2 hours | 2 meals | 4 rooms | 3 meals | 3 rooms |
| Opportunity Cost | \(\frac{-2r}{+1m}\) | \(\frac{-0.5m}{+1r}\) | \(\frac{-1r}{+1m}\) | \(\frac{-1m}{+1r}\) |
| Sean | Bryan | |||
|---|---|---|---|---|
| Cooking | Cleaning | Cooking | Cleaning | |
| Time to completion (min) | 60 | 30 | 40 | 40 |
| Units produced in 2 hours | 2 meals | 4 rooms | 3 meals | 3 rooms |
| Opportunity Cost | \(2r\) | \(0.5m\) | \(1r\) | \(1m\) |
| Sean | Bryan | |||
|---|---|---|---|---|
| Cooking | \(Cleaning\) | \(Cooking\) | Cleaning | |
| Opportunity Cost | \(2r\) | \(0.5m\) | \(1r\) | \(1m\) |
Sean would never give up more than ___ cleaned rooms for 1 meal
Bryan would never accept fewer than ___ cleaned room for 1 meal
terms of exchange: ___ rooms for each meal
| Sean | Bryan | |||
|---|---|---|---|---|
| Cooking | \(Cleaning\) | \(Cooking\) | Cleaning | |
| Opportunity Cost | \(2r\) | \(0.5m\) | \(1r\) | \(1m\) |
Sean would never give up more than 2 cleaned rooms for 1 meal
Bryan would never accept fewer than 1 cleaned room for 1 meal
terms of exchange: 1.5 rooms for each meal
| Sean | Bryan | |||
|---|---|---|---|---|
| Cooking | \(Cleaning\) | \(Cooking\) | Cleaning | |
| Opportunity Cost | \(2r\) | \(0.5m\) | \(1r\) | \(1m\) |
Bryan would never give up more than ___ meals for every 1 cleaned room
Sean would never accept fewer than ___ meals for every 1 cleaned room
terms of exchange: ___ meals for each room
| Sean | Bryan | |||
|---|---|---|---|---|
| Cooking | \(Cleaning\) | \(Cooking\) | Cleaning | |
| Opportunity Cost | \(2r\) | \(0.5m\) | \(1r\) | \(1m\) |
Bryan would never give up more than 1 meals for every 1 cleaned room
Sean would never accept fewer than 0.5 meals for every 1 cleaned room
terms of exchange: 0.75 meals for each room
| Keri | James | |||
|---|---|---|---|---|
| Gadgets | Widgets | Gadgets | Widgets | |
| Production | 50 | 25 | 30 | 10 |
| Opp. Cost | \(0.5\,W\) | \(\boldsymbol{2G}\) | \(\boldsymbol{0.\overline{3}\,W}\) | \(3\,G\) |
| Specialized Production | 50 | 25+10 | 30+10 | 10 |
| Opp. Cost | ||||
| Keri | James | |||
|---|---|---|---|---|
| Gadgets | Widgets | Gadgets | Widgets | |
| Production | 50 | 25 | 30 | 10 |
| Opp. Cost | \(0.5\,W\) | \(\boldsymbol{2G}\) | \(\boldsymbol{0.\overline{3}\,W}\) | \(3\,G\) |
| Specialized Production | 50 | 25+10 | 30+10 | 10 |
| Opp. Cost | \(\frac{-35 W}{+ 50 G}\) | \(\frac{-50 G}{+ 35 W}\) | \(\frac{-10 W}{+ 40 G}\) | \(\frac{-40 G}{+ 10 W}\) |
| Keri | James | |||
|---|---|---|---|---|
| Gadgets | Widgets | Gadgets | Widgets | |
| Production | 50 | 25 | 30 | 10 |
| Opp. Cost | \(0.5\,W\) | \(\boldsymbol{2G}\) | \(\boldsymbol{0.\overline{3}\,W}\) | \(3\,G\) |
| Specialized Production | 50 | 25+10 | 30+10 | 10 |
| Opp. Cost | \(0.7 W\) | \(1.43 G\) | \(0.25 W\) | \(4 G\) |
Allocative efficiency: Goods and services reflect what people value most
In decentralized markets:
Result:
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.”
“Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
“[Without trade restrictions] the obvious and simple system of natural liberty establishes itself of its own accord. Every man…is left perfectly free to pursue his own interest in his own way…. The sovereign is completely discharged from a duty [for which] no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.”
“The man of system…is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.”
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” - FA Hayek (1988)
“The property which every man has in his own labour … is the most sacred and inviolable. The patrimony of a poor man lies in the strength and dexterity of his hands; and to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbour, is a plain violation of this most sacred property. It is a manifest encroachment upon the just liberty both of the workman, and of those who might be disposed to employ him. As it hinders the one from working at what he thinks proper, so it hinders the others from employing whom they think proper. To judge whether he is fit to be employed, may surely be trusted to the discretion of the employers whose interest it so much concerns. The affected anxiety of the law-giver lest they should employ an improper person, is evidently as impertinent as it is oppressive.”
“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”
“Laissez-faire”: An economic doctrine that opposes governmental regulation of or interference in commerce beyond the minimum necessary for a free-enterprise system to operate according to its own economic laws.
“What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”
Paper citation: Grier and Grier (2021)